Alcatel overhaul aims to cut costs by €1bn

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Alcatel-Lucent unveiled a restructuring plan to cut costs by €1bn and raise €1bn via asset sales to try to reverse the decline of the once mighty French-US telecoms equipment maker.

The proposals, announced on Wednesday by new chief executive Michel Combes, are the biggest corporate overhaul of the group since the $13.4bn merger of France’s Alcatel and Lucent of the US in 2006.

Shares in Alcatel-Lucent rose more than 7 per cent after Mr Combes promised that the group would become positive free cash flow in 2015. The so-called Shift Plan, he promised, would not just be another Alcatel-Lucent restructuring.

Mr Combes, the former Vodafone executive who joined in April, outlined targets to reduce gross debt by €2bn, from €5.6bn at present, in part through further asset disposals, although potential future equity raisings have not been ruled out. Mr Combes declined to say which assets will be sold.

Mr Combes aims to end the longstanding strategy of operating across a wide range of telecoms industries and focus on rapidly growing internet-based services as well as the fast fibre and 4G mobile networks.

These operations will benefit from more than 85 per cent of future research and development spending, in effect consigning the rest of Alcatel-Lucent’s operations to be seen as non-core. These assets will be managed for cash while the group decides what to sell.

Such a strategy is likely to lead to more than 10,000 job cuts, from an employee base of more than 70,000, according to estimates by analysts. The management will be rejigged following the retirement of chief operating officer Paul Tufano. Alcatel would not comment on job cuts.

Alcatel’s business model was seen internally as unsustainable, which has caused a new focus on high-speed web access operations based on its strong relationships with customers.

Alcatel is expected to pursue companies that have impinged its portfolios of patents – one of the largest in the industry given its ownership of research centres such as Bell Labs in the US – to generate additional revenues from its legacy research.

Alcatel-Lucent has been mostly lossmaking since the merger of the two groups in 2006 in spite of turnround attempts under previous boss Ben Verwaayen. Alcatel’s market capitalisation, which stands at €3.3bn, has slid 80 per cent since the merger.

Alcatel’s strategy is similar to that adopted by Nokia Siemens Networks, which has cut 17,000 jobs and sold parts of its business to return to profit.

Analysts say Alcatel has misjudged rapid changes in the industry by trying to be an “all-service” provider of equipment whereas rivals in Europe have narrowed their focus to high-growth areas. It has struggled as the fiercely competitive telecoms equipment market has been commoditised at the basic level, and rivals have taken a lead in growth areas. Last summer, one analyst cut his price target on the US-traded stock to $0, reflecting worries that it was bound to fail.

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